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Improving the statistical power of financial event studies: The inverse variance weighted average-based test

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  • da Graça, Tarcisio B.
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    Abstract

    Some claim that the event study methodology literature is "mature". But the overlooked IVWA-based test is more powerful than conventional tests. Its implementation requires the same inputs as the traditional test. Its functional form yields the power improvement. Using CRSP monthly data for 1944-1971 and 1980-2006, simulations indicate that IVWA-based test correctly rejects the null hypothesis substantially more frequently than the traditional test. Its superiority seems more pronounced over 1980-2006. This casts doubts over previous event studies that failed to reject the null. They may have done so incorrectly due to lack of statistical power. Their reevaluation under IVWA-based test is advisable.

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    File URL: http://www.sciencedirect.com/science/article/B6VFG-4YTV7VW-1/2/91ea4c8bc2a7d3a90b62856c14d305f7
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 17 (2010)
    Issue (Month): 4 (September)
    Pages: 803-817

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    Handle: RePEc:eee:empfin:v:17:y:2010:i:4:p:803-817

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    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Event study Simulation CRSP data Statistical test Statistical power;

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    1. Malatesta, Paul H., 1986. "Measuring Abnormal Performance: The Event Parameter Approach Using Joint Generalized Least Squares," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(01), pages 27-38, March.
    2. Thompson, Rex, 1985. "Conditioning the Return-Generating Process on Firm-Specific Events: A Discussion of Event Study Methods," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(02), pages 151-168, June.
    3. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    4. McDonald, Bill, 1987. "Event Studies and Systems Methods: Some Additional Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(04), pages 495-504, December.
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